My daily readings 09/24/2010

How much does our first $20 angel investor get? Well, he gets to participate like he was investing $20 today, plus he gets a discount to the valuation. So instead of getting $20 / $750 = 2.67% of the company, maybe he got a 20% discount to the valuation, so he gets $20 / (.8 * $750) = 3.33% of the company. (We’re ignoring the effect of interest here for simplicity, but he probably effectively has $21 and change invested by now in real life.)

We haven’t discussed valuation caps yet. Valuation caps are intended to prevent the startup dragging its feet on raising money, thus building up lots of worth in the company, and then the angel investor getting cheesed. For example, if they had just grown through revenues for a year or two, they might be raising money at a valuation of $1,250. In that case, $20 only buys you 2% of the company (remember, he gets a 20% discount : $20 / (.8 * $1250) = 2%), which the angel investor might think doesn’t adequately compensate him for the risk he took on betting on a small, unproven thing several years before. So we make him a deal: he gets to invest his $20 at the same terms as the VCs do if, and only if, the valuation is less than $750. If it is more than $750, for him and only him, we pretend it was $750 instead. This means that under no circumstances will he walk away with less than $20 / (.8 * $750) = 3.33% of the company, as long as the company goes on to raise further investment. (Obviously, if they fold, he walks away with nothing. Well, technically speaking, with debt owed to him by a company which is bankrupt and likely has no assets to speak of, so essentially nothing.)

I think that just about covers it. Make sense? Anybody feel free to correct me if I botched something here, this is not quite my bag.

I think “black and white” is a problem here… I see no reason why Arrington can’t be right while McClure can honestly believe that there was nothing wrong with the meeting.

Conspiracy theories grow on the basis of black and white, good vs. evil, etc. Outside of programming, aren’t we all used to varying shades of gray?

wolfrom said Arrington right and McClure honestly believe.

Believe is very different to wrong. If Arrington is right, McClure is wrong in his belief. He can still honestly believe it though.

One, or all, of Christians, Muslims and Atheists are wrong in their belief, but they can all honestly believe.

I’m not being pedantic here, if you read wolfrom’s statement with the correct meanings you’ll see how wrong your comment is, even if you honestly believed it.

“If you’re an entrepeneur you believe Arrington.”

I disagree, I personally think Arrington made a bit too far of a stretch.

Did a bunch of super angels get together and talk shop? Definitely. Are they talking about how high valuations are right now? Probably. Once you get into the “concrete plans for how to control the world” it gets a lot sketchier.

There’s a strong difference between someone saying “company X is raising at a really high valuation, you shouldn’t stand for that” and “company X is raising at a really high valuation, don’t take it or there will be consequences”. Startups talk about investors all of the time, why should the investors be any different?

Whether Arrington was right or wrong, there’s probably some truth that angels hate YC. It’s based on the whole premise that VC’s and angels aren’t all their cracked up to be. It would make sense that these “superangel” gatherings would discuss their slipping hold on power and how to get it back.

What kind of self-respecting conspiracy that aims to subvert the startup world with collusion among major players discuss their doings over twitter? Someone please buy these guys a copy of Cryptonomicon.

A Silicon Valley angel conspiracy without Ron Conway isn’t really much of a conspiracy.

Ron Conway to the super-angels: I’m in this game because I love seeing entrepreneurs build cool stuff. You guys aren’t. Stop worrying about term sheets and valuations and worry about adding value beyond cash. I’ve wanted to say this for a long time, but have bit my lip in your presence. I no longer want to be involved with any of you. And Dave McClure, quit being a classless embarrassment to Silicon Valley.

That is a good summary. However, I’m surprised that so many other comments talk about Conway rocking, being a great individual etc.

When I read his email, my thought was that the email was a great image-building propaganda tool and that he wrote it with the knowledge that the email would be made public.

His email talks how great he is, how he loves entrepreneurs and how other investors are in it for self-serving factors like ego and money. Of course, I have no way of knowing whether that is true or not. However, I’m willing to bet that many unscrupulous investors could easily write a similar email.

I would have similar doubts about Conway’s authenticity here except that doesn’t fit with what I’ve heard pretty much everywhere else about the kind of person he is to do deals with and work with.

Maybe he wouldn’t have written that email if this story hadn’t been aired. Maybe he would have. But the email fits with his past actions, so to me it doesn’t matter.

My guess is that he knew the email would be aired, and he wrote it to entrepreneurs as much as to the super-angels. His brand is all about trust-with-entrepreneurs, and if he loses that his deal-flow gets severely cut down.

To solidify that trust, he publicly threw down the line in the sand and said, “I’m on the entrepreneur’s side. Always. I’m even willing to give up friendships / partnerships with these other investors to prove that loyalty.”

He knows more about how these guys act behind closed doors than absolutely anyone. I think it’s official now: these guys were being bad and they got an appropriate bitch slap.

Hopefully that’s the end of it. I’m sure none of them are genuinely bad guys. There’s probably just a side of some of them that’s a bit greedy and stupid. Hopefully this will be the lesson they all need to keep that side suppressed permanently.

My respect for Arrington keeps going up, and I can’t help but admire what Ron Conway has to say about this. The no-bs approach works for him. I’m glad he called out the writing, I guess McClure’s money is still green, but I don’t think I could take anyone that writes like that seriously.

Edited for clarity.

Arrington has has obviously lit a match to a powderkeg with “So a blogger walks into a bar…”. McClure’s response came across (to me) as defensive, which at least confirms that there is a concern about the appearance of impropriety.

I would love to know who was at this meeting and who got this email from Conway.

There are some useful short-term consequences of this:

1. These super angels probably don’t trust each other anymore (“who tipped off Arrington?”). This is a good thing;

2. Meetings like this are less likely to happen in the short term. If they do, they’ll probably be somewhere private (the back of a restaurant is not private); and

3. It highlights the importance and value of reputation and integrity (of which Conway’s cup overfloweth).

This guy is an upstanding individual and really cares about startups. I’m glad people like him exist. Maybe some day I’ll be lucky enough to have him invest in one of my projects.

I really like how he called McClure out. I know McClure is a smart guy and allegedly a great investor, but he is quite classless and the f* this f* that attitude is embarrassing to what are supposed to be a group of intelligent, successful, and perhaps caring individuals.

Ron Conway rocks but the email almost feels like it was intended to be leaked.

So that I would not be influenced by any outside inputs I am writing this without sharing my thoughts with anyone including David Lee and the other SV Angel Partners.

I want to clarify once and for all my total disagreement with your values and motives for being investors.

I have stated consistently for year that I invest because I love helping entrepenuers and watching them learn and succeed.

I think you have a different value set and lets agree to disagree and not have to even engage in any idle chit chat or discussion of any sort….ever.

Furhermore, I regret David Lee was involved in the gatherings. I am sure he does too.

We talked about the first dinner and I encouraged him to write the email above and withdraw….I know he was uncomfortable with both gatherings….where no one was there to speak up for the interests of the entrepenuers.

Please keep this confidential even though I know that will be hard since two of you let your egos take over and show Arrington how important you are by telling him you were headed to a “secret” angel gathering.

Dave McCLure…pls try not to blog about this and cause silicon valley more embarrassment with your unprofessional classless writings

“The world of startups would be a better place if you spent less time complaining about deal structures, terms, vc’s, and valuations etc and the cars you drive, and just helped entrepenuers build their companies.”

which is why he’s the most successful angel investor in the history of angel investing.

Absolutely. Wow. Good reminder to all of us to focus on what’s important.

It doesn’t take someone deeply engulfed in the situation to figure out what McClure is talking about. Clearly, Ron Conway, founder of SV Angel and the most prominent angel investor in Silicon Valley, sent an email to other angels involved in the situation. Clearly, that email was in opposition to McClure’s stance that those at the meeting were doing nothing wrong. David Lee, who McClure mentions, is a partner at SV Angel and was at the meeting.

So I did what any self respecting blogger would do – I drove over to Bin 38, parked my car and walked in.

Complaints about Y Combinator’s growing power, and how to counteract competitiveness in Y Combinator deals

Complaints about rising deal valuations and they can act as a group to reduce those valuations

How the group can act together to keep traditional venture capitalists out of deals entirely

How the group can act together to keep out new angel investors invading the market and driving up valuations.

More mundane things, like agreeing as a group not to accept convertible notes in deals (an entrepreneur-friendly type of deal).

One source has also said that there is a wiki of some sort that the group has that explicitly talks about how the group should act as one to keep deal valuations down.

Collusion and price fixing, that’s what. It is absolutely unlawful for competitors to act together to keep other competitors out of the market, or to discuss ways to keep prices under control. And that appears to be exactly what this group is doing.

This isn’t minor league stuff. We’re talking about federal crimes and civil prosecutions if in fact that’s what they’re doing. I had a quick call with an attorney this morning, and he confirmed that these types of meetings are exactly what these laws were designed to prevent.

Like I said, it’s the mobile component that’s most compelling. You could be at a bookstore, scan a book you may want to read, then come home to all sorts of info: Amazon reviews, price comparisons, and so on.

Again, the main idea here is to help you remember stuff. You’re out, doing your thing, see a bunch of stuff, send ‘em off to SpringPad so when you get home you can parse through it all at your leisure. I’m not one to “hoard” too much information while sitting in front of my computer—I have zero bookmarks set on my current Firefox installation, as crazy as that sounds—but the idea of having a sort of depository for my mobile could prove entertaining.